A stark warning has been issued to business owners who have
guaranteed a business bank overdraft or loan against the family home or
other assets.

The warning comes after a recent High Court ruling which has made
it more difficult for banks to retrieve money from the business and who
instead, are likely to call in the guarantee.

'The majority of small and medium sized business that need
cash turn to their bank and many business owners have agreed to
guarantee the loan, often against their main asset, their family
home,' said Alan Gardner, corporate finance director at the
Birmingham office of Haines Watts.

'There seems to be no difficulty in that until things go wrong
- and this recent High Court ruling has potentially exacerbated any
problem.'

Mr Gardner said that, in the past, the main security for bank
loans, such as overdrafts, had been the book debt of the company. Banks
retrieved those funds speedily providing guarantors with some security.

Now, as a result of the High Court ruling, banks can only retrieve
money from book debt after the demands of employees and liquidators have
been satisfied.

'Almost certainly banks will be left short and so their first
line of defence will be to call on the guarantor - and where that
guarantee involves the family home, there are some very real
risks,' said Mr Gardner.

'We are now recommending any client that has guaranteed a loan
against his or her house to review the status of that loan and see if it
might be possible to obtain some other form of guarantee or
alternatively, some other loan mechanism.'

In particular, Haines Watts is advising companies to consider debt
factoring or invoice discounting facilities - rather than overdrafts.

In these instances, the bank, or a specialist division, buys and
owns the debt which it collects from the ultimate customer. It normally
pays for this by funding between 75 and 80 per cent on purchase and the
balance when ultimately collected.

'In this way, in the event of insolvency, the debtors are an
asset of the bank or finance house, and not the company.

'They are therefore less likely to fall back on personal
guarantees,' said Mr Gardner.

'We actively discourage personal guarantees but if essential,
advise most strongly that they are limited to realistic values.

'This might be the sort of amount that could be comfortably
recovered for the bank from the debtors, or the fixed charge over plant,
or security over stock - provided the directors give some assistance to
the liquidators in the realisation.' Haines Watts is also
recommending use of the Small Firms Loans Guarantee Scheme in
conjunction with invoice discounting and factoring where the
shareholders have few other assets.

Mr Gardner has also warned the business owner's spouse to be
on the look out.

'Having a home as a guarantee for a business loan also poses
enormous risks for wives or partners. It is entirely feasible they do
not know how the business is performing nor indeed, the exposure that
they face,' said Mr Gardner.

'If the company goes bump, it's more than the business
they could lose.'

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